Comparing Apples with Oranges
Updated: Jul 9, 2021
It's one thing to compare apples with apples. Comparing apples with oranges is a little more complex. Jason, what are you talking about?
Let me try to explain a little better. You will have seen some very cheap rates being advertised and headlined heavily by most lenders. On the face of it 1.84% is a great rate and I’m certainly not going to try to argue otherwise. If you would like this rate locked in for the next two (2) years please schedule a time to chat with us here and we will arrange this great rate for you right now. However, if your focus is to pay off your home loan as soon as possible (and lets assume that’s not in the next two years) then perhaps you need to look further into the future.
The Reserve Bank of Australia (RBA) has repeatedly stated, as recently as two days ago (6/7/21), that they plan to keep the cash rate at the current levels until 2024. However, many are seeing the recent strong recovery data as a reason for rates to be lifted earlier - perhaps as early as 2023.
By keeping the cash rate at current levels of 0.10% the RBA hopes to help stimulate the economy. The stated aim is to have inflation reach and then maintain 2% - 3% range. In addition, the RBA wants to see wages growth start to move again. Noting this was a pre-pandemic problem and will take a long time, longer than our OECD partners, to correct.
All this is very interesting (or not) but what does it mean for my mortgage and my repayments?
The first question to ask is how much are you paying right now? If you are like 70% of our clients and took a variable rate with a major lender several years ago then you are currently paying a low 3% rate. This is not a bad rate (historically), but it is about 1% more than you could be paying.
Some smaller lenders are using this current mortgage activity to attract new clients. Variable rates as low as 1.99% are available to homeowners. Low variable rates, some with cashbacks of up to $3,000 are available with some lenders such as ING, Macquarie Bank, AMP or Bendigo Bank.
So, if you are going to move lenders then why not consider grabbing a super-cheap fixed rate in the process? As we mentioned above, fix for 2 years and we can arrange 1.84%. However, the 3 year fixed rates are as low as 1.88% may be a better option. What about a 4 year rate at 2.19% or a 5 year fixed at just 2.29%.
The table below sets out these options:
Firstly let me explain that the variable rates shown in the table are just estimates. Per the following criteria.
Act - Actual
Est - Estimate based on recent RBA statements
GM - Guesstimate based on current data research
Gue - We are simply guessing now.
Please keep in mind, these estimates increase in variability the further into the future we look. The more optimistic your view on the future of the Australian economy, and wages growth the longer you should probably fix for - say 3 years to maybe even 5 years. Because the sooner the economy is back on track the sooner the RBA will lift the cash rate - making longer term fixed rate the winner.
Alternatively, if you have a more pessimistic view and perhaps think that the Covid-19 variants will continue to cause lock-downs or the vaccination program will not work as planned or other worst-case scenarios, then you should consider staying variable or taking a short-term fixed rate. This will let you benefit from the RBA being forced to keep the cash rate low or even dropping the cash rate.
Fixed rates do of course offer you stability. Knowing your rate is locked in for the next X years is comforting. It allows you to budget and plan better.
Based on the above table the 3 year fixed offers a good bet either way. The average rate paid of 2.10% over the next 5 years would be marginally better than the 2 year fixed rate option. Keep in mind that when your fixed rate expires you have the option of shopping around for another fixed rate. What fixed rates will be in the future is anybody's guess and I am not even going to try.
In any case and any scenario if you are currently paying 3.something percent on your current mortgage you should be changing as soon as possible.
Of course your own circumstances should be considered. Fixed rate mortgages have very high exit costs so if for any reason you think you may sell or need to refinance it will end up costing you more. Other personal considerations should be accounted for when deciding to fix and for how long.
We welcome the opportunity to discuss these options and your circumstances with you - schedule a Zoom/Google Hangouts/other online/phone appointment here, email email@example.com or call us on 1300668017.
If you would like to read more on this topic business reporters Michael Janda and Stephanie Chalmers from ABC have this story discussing current mortgage rates and the RBA and the Financial Review has RBA nails 0.1pc cash rate until 2024.